Date: July 21, 1998
To: Mr. Jonathan Katz, Securities and Exchange Commission (fax202.942-9651)
From: Ted Yong, President, GP Express (GPX), Inc.
RE: S7-14-98
Dear Jonathan:
Pertaining to the SEC's intent, stipulated under S7-14-98, to amend the shares
of Rule 504, from free-trading shares to Rule 144 shares, our investment
banking company wishes to advise you for the record, that our company is
totally against the enactment of said amendment for the following reasons:
1. Effects of S7-14-98 on Legitimate Small Businesses and High-Tech
Startups.
Our company specializes in the public offering of high-tech and medical
companies, with proprietary technology. Many legitimate small businesses and
startup ventures approach our company to seek the initial public financing,
pursuant to Rule 504, not Rule 505, since many accredited and non-accredited
investors brought in by these companies insist on the free-trading nature of
the public offering shares, as a condition for their investment. Your intent
to amend the shares of Rule 504 from free-trading to Rule 144 shares will
destroy the possibility of many legitimate small businesses and startups,
especially those with high-tech proprietary technologies, to gain immediate
access to the public financing market. It is beyond our company why someone
would temper with the venture capital market provided by the Rule 504 vehicle,
when the nation's entrepreneurs are flourishing in our thriving economic
environment. The intent of S7-14-98, when implemented, will risk the slowing
of our economic engine and stifling of high-tech entrepreneurship, since most
of the new jobs are generated by entrepreneurial small businesses. In
addition, your intent to amend Rule 504 will inevitably drive many legitimate
U.S. small business deals to the Vancouver market and the Toronto OTC Market,
at a time when our nation needs to incubate many emerging high-tech businesses
seeking capital on our own soil;
2. Need of SEC Initiative on Uniform Disclosure Standard for Rule 504. In
S7-14-98, as a reason for the implementation of the amendment, your agency
cited that "some states do not require disclosure documents." As of today,
most of the states, our company regularly files Rule 504 offerings on behalf
of our client firms (WA, NV, NY, FL, OK, D.C., CO, and others), all require a
complete disclosure prospectus or offering memorandum, styled in a
conventional manner or SCOR format. New York, for example, in its M-11 Form,
in addition to a prospectus, requires the complete disclosure of the business
and criminal background of all directors. In addition, the SEC's intent to
amend Rule 504 may be inferred that there is a lack of the SEC's trust of our
States' competency to appropriately legislate, review, and approve Rule 504
offerings locally, involving the investment of the States' residents,
especially in the light that the SEC has no declared intent to amend
Regulation A in a similar manner, which requires federal approval;
Remedy 2.1: Although most of the States require some form of disclosure for a
Rule 504 offering, the States lack uniform disclosure standards for Rule 504
offerings. The SEC should take the initiative to enact uniform regulations for
disclosures, involving Rule 504 offerings. This will also make the job of the
States' securities divisions easier. Thus, it is our belief , that what is
called for immediately, related to this aspect of S7-14-98, is that the SEC
should amend the Rule 504 provision, in a manner that all states must require
complete disclosures of the issuer, which must contain a complete offering
memorandum, with complete disclosure of the proposed business and risk factors,
along with descriptions of shares, usage of proceeds, and analysis of share
dilution. The risk factor section should entail offering related risk factors
,as well as business related risk factors, specific to the issuer's business.
The offering memorandum must be styled in a conventional manner (like an S-1 or
SB-2 offering prospectus, not a simple SCOR offering disclosure). To complete
the disclosure of the issuer, the issuer must also submit a notarized
disclosure of the criminal and securities fraud background (due diligence) of
each officer and director of the Board (this is already required for NASD
Listing), a complete disclosure of all corporate contractual obligations
involving the issuer, a subscription agreement with ample warnings to investors
related to the potential loss of their entire investments, a Form U-2 for
Process Serving, a CPA audited financial of the past 18 months prior to the
offering, a presiding securities counsel letter commenting on the compliance
and tradability of the shares of the issuer. Your agency may also require the
issuer to file said disclosure documents with the SEC along with Form D, to
obtain exemption status;
3. Amendment to Require Audited Financial Disclosure for Rule 504
Offerings.
In your S7-14-98, posted on your website, it was mentioned that a Rule 504
does not require financial disclosure, since under said federal exemption
provision no audited financial is required, if the issuer cannot afford the
audit. It is our opinion that this loop hole in the federal statutes,
involving Reg. D, Reg. A, and other provisions, could be eliminated by simply
enacting amendments requiring audited financial for all offerings. In fact,
this is already being done for all Rule 504 offerings prepared by our company;
Remedy 3.1: Our company wishes to recommend to your agency to amend the Rule
504 provision to require a complete 18 months CPA audited financial to be
filed with the State and the SEC. Also, it is our understanding that to gain
secondary trade status, an S&P or Moody Listing must be filed. The Listing of
a Rule 504 offering with S&P Corporation already requires the submission of an
initial financial audit, an interim audited financial if any, an offering
memorandum, all corporate contractual obligations, subscription agreement
disclosing investment risks, and any and all documents utilized for the sale
of the issuer's offering. Said documents must also be filed with the NASD for
OTCBB Listing;
4. Amendment to Require 20F Filing for All Microcap Companies Traded on the
OTCBB. Related to the financial disclosure requirement stated above, it is
our understanding that the NASD has already amended its regulation to require
20F financial disclosure for all publicly traded companies on the OTCBB,
pending approval by the NASD member firms (10/97 NASD OTCBB Board Meeting).
This is already a requirement for all foreign issuers traded on the OTCBB.
Remedy 4.1: The SEC should enact amendment to Rule 504, requiring 20F
disclosures for all Rule 504 companies once traded on any microcap market;
5. Amendment to Revoke Right to Short; Amendment to Control Bid
Manipulation.
If the SEC wishes to stop fraudulent stock manipulation on the OTCBB and
NASDAQ Small Cap, your agency should introduce rules to control two mechanisms
frequently used by unscrupulous promoters and broker dealers, which are : a)
unrestricted shorting of shares by broker dealers of these shares, which
already have small floats and are thinly traded. Most of the OTCBB deals
collapse, not because of the failure of the operating company's business, but
rather due to unrestricted shorting implemented by a third party promoter
working in conjunction with a broker dealer; and b) manipulated market
trading resulting in a quick doubling and tripling of share bid, with small
volume relative to its total float. This is especially true involving one
cent a share offering. A penny a share offering may have 10 to 50 million
shares, if not more, in its public float. From our recent observation, the
SEC has allowed some of these shares, involving penny-a-share issuers, to
double and triple in the share prices without any stop order or investigation,
despite the share price move may involve only 100,000 shares, representing
only a small percentage of its total float. Our company has been approached
by potential clients to conduct penny-a-share Rule 504 offering, which we
abruptly turned down;
Remedy 5. l: To obviate the problem involving penny-a-share Rule 504 offering,
the SEC should amend the Rule 504 to restrict the offering share price to no
less than 25 cents and establish a rule to regulate the increase in bid price
in trade, based on the percentage of the total float (when share bid doubles
or triples) rather than the actual trade volume, which could be quite
deceiving;
Remedy 5.2: The lower limit of the share price of a Rule 504 offering should
be set at no less than 25 cents a share, and not $5, since from our
experience, many SCOR offering deals failed to complete, due to its no less
than $5 per share restriction, which is not competitively priced for most
investors in the IPO market and in aftermarket trade (some seasoned NASDAQ
issues trade below $5);
Remedy 5.3: In addition, the SEC should revoke the ability of the broker
dealers to short microcap shares traded on the OTCBB and NASDAQ Small Cap,
entirely, giving these small but emerging companies a chance to survive the
slings and arrows of a merciless market, providing them with the opportunity
to mature and create jobs. In the end, all the public offering provisions
exist for a single purpose in our nation, which is create wealth and jobs;
6. "Pump and Dump" Practice. Your agency's comment regarding "the pump and
dump" practice by some unscrupulous promoters and broker dealers, involving
Rule 504 has validity, but not limited to Rule 504. The widely publicized
scheme, involving an Arizona public company and the mafia, operated by Gordon
Hall, already once cited by the SEC, was traded on the NASDAQ Small Cap, not
the OTCBB. Furthermore, said Arizona company did not utilize Rule 504 to obtain
initial trading status from the NASD. In fact, it is the understanding among
most investment bankers, that the OTCBB cannot generate enough volume due to
many restrictions, involving penny stock regulations. To make the "big catch"
by defrauding investors, a crooked promoter knows minimally he must trade his
shares on the NASDAQ Small Cap, if not NASDAQ National Market, to generate the
needed volume. It is our company's opinion, that in terms of dollar volume,
there is perhaps more investment fraud occurring on the NASDAQ Small Cap, than
the OTCBB market, especially in term of "pump and dump" practices, simply
because the NASDAQ Small Cap has less trading restrictions;
Remedy 6.1: Our company believes it is the legislated duties of the SEC, as a
federal agency, established by acts of Congress, to keep a constant vigilant
eye on the unscrupulous promoters and broker dealers, practicing the art of
"pump and dump," to defraud investors. This is why we have the SEC, to
enforce the Act of 1933, the Act of 1934, and other federal securities
statutes, to maintain a viable investment market place and to obviate the
recurrence of 1928;
7. Need of Greater Policing by the SEC. Unscrupulous promoters, previously
cited by the SEC, are still structuring deals involving Rule 504, SCOR, Reg.
A, public shell mergers, and even SB-2. One such operator, who was cited by
the SEC in the early 90's and escaped to a foreign country due to civil
litigations, is now back in San Diego, after seven years, conducting deals,
utilizing another group as his front.
Remedy 7.1: The SEC should employ the "two strikes you are out" rule,
disallowing any individual with a securities fraud or manipulation record after
the second offense, from ever participating in securities dealing. The SEC,
working in conjunction with the NASD, need to enforce the "bad boys" provisions
more aggressively. To ensure the individual cannot operate with a false front,
the SEC should prosecute those who knowingly associate with such individual in
pubilic offerings;
8. Most Rule 504 Problems Cited in S7-14-98 Occur in Aftermarket Trade, Not
at the IPO Level. Many of the stated problems associated with S7-14-98 occur
not at the offering stage, and thus have very little to do with the nature of
the Rule 504 vehicle. In fact, most of the problems cited by the SEC as the
causes for S7-14-98 are found in aftermarket trade. Thus, it is our opinion
that the SEC's analysis of the correlation, between the problems cited and
their causes, is wrongly based. There are only two basic components to the
stated problems found in S7-14-98, which are: a)the Rule 504 vehicle and b)
the operators of the vehicle. Most of the problems cited by your agency as
causes for S7-14-98 are found with the operators of the vehicle, not with the
Rule 504 vehicle itself. When a driver purchases a vehicle and kills one
hundred pedestrians, the driver is at fault, not the vehicle or the person who
sold him the vehicle. Simply, the driver could have perpetrated the same
crime in any vehicle, with a Toyota Tercel or a Ford Explorer. It is
impossible to measure the intent of individuals. Again, this is why we have
the SEC to enforce the trading rules, involving microcap issues, to assure no
operator run over investors at 100 miles an hour, regardless whether the
operator is behind the wheel of a Rule 504, a Reg. A, an SCOR, an SB-2, or an
S-1, for that matter. Also, from our company's observation, many of the
stated fraud problems stipulated in S7-14-98, actually involve older public
shell mergers, in which the owner of a shell works unlawfully in conjunction
with the acquirer to render the insider shares freely trading, in breach of
Rule 144. Under Rule 144, when the insider shares change hands, from the
original insiders to the new control persons, the shares are once again
restricted for the new operators of the public company.
Remedy 8.1: The SEC should prosecute the unlawful operator, not rendering the
shares of the Rule 504 vehicle restricted from trade for one year;
Remedy 8.2: Prior to the approval of the merger involving a public shell, the
SEC should enforce Rule 144 for all public shell mergers, making sure the
controlling insiders shares purchased by the acquirer of the shell become once
again restricted under Rule 144. In fact, the SEC should enact new regulation
to re-restrict all restricted shares for a period of one year in a public shell
merger transaction, including those restricted shares retained by the original
owner, since the rules in this area are so frequently infringed. The SEC
should prosecute those operators (shell owners, stock transfer agencies, shell
purchasers) who conspire to remove the legend on said shares, in breach of Rule
144.
Lastly, in summary, the SEC's intended amendment on Rule 504 will render the
Rule 504 provision useless to all issuers, since similar provision is already
provided by Rule 505 with higher aggregate offering limit. If the amendment is
enacted, the investment banking industry will regard the amended Rule 504
provision as an impotent provision, not worthy of the ink and paper it is
printed on. The amendment will drive most investment bankers and securities
counsel to replace Rule 504 usage with Regulation A or SCOR, or alternatively,
to the Vancouver Stock Exchange. When a car needs repair in America, most of
us will attempt firstly to get it fixed, rather than driving it off the cliff.
It is our company's belief that the SEC should remedy the Rule 504 fraud
problem with similar approach, to fix it first. Our company is in agreement
with your agency that there are abuses involving Rule 504, as it is true
involving Reg. A, SCOR, and SB-2. However, there are many ways to remedy this
problem by introducing reasonable measures, some of which are hereunder stated,
which do not involve amending the shares of a Rule 504 offering untradable for
a period of one year, rendering the Rule 504 vehicle unusable. Our company also
firmly believes that the enactment of such unreasonable measure will depress
the public financing of legitimate small business with new and proprietary
innovations, which will ultimately affect the entrepreneur spirit in our
forward thinking nation. Our recommendation to your agency regarding this
issue is to "fix it and not dump it." To amend the Rule 504 shares untradable
for a period of one year would be "dumping" it, rendering the provision
unusable for the investment banking industry. The SEC and the investment
banking industry are like two creatures, each of which has only one eye.
Perhaps, if we put our heads together, we will achieve binocular vision with
greater depth perception, to resolve problems ahead of us.
If you have question, pertaining to the above information, please do not
hesitate to call 805-297-1985, fax to 805-297-7256, or E-mail to gpxi@aol.com.
Cordially,
Theodore H.Y. Yong
President, GP Express, Inc.